Texas Regulator Touts Power-Plant Upgrades as Costs Sow Doubts

(Bloomberg) -- Texas' top electricity regulator touted progress under a plan to pay generators extra to meet power crises even as opposition grows over the program's $460 million in annual costs to businesses and homeowners.

“In January and February, in just a couple months, there have been several thousand megawatts announced of new dispatchable generation,” Peter Lake, chairman of the Texas Public Utilities Commission, said in an interview.  

The Performance Credit Mechanism, which would provide generators extra revenue to build more power plants, is seen as a way to avoid a repeat of deadly blackouts that took place in February 2021 after widespread power plant failures. PCM, backed by Governor Greg Abbott, would cost households and businesses about $460 million a year, according to a report by an independent consultant hired by the state.

Within the past month, Calpine Corp. said it is starting development for a roughly 425-megawatt natural gas-fired power plant about midway between Dallas and Houston, the Lower Colorado River Authority said it will build a 192-megawatt plant in Central Texas and WattBridge said it has plans to develop another 1,600 megawatts of generation. One gigawatt is typically enough to power 200,000 homes in the state. 

Lake said Texans are ready to accept the notion of generator payouts and are willing to pay the extra $2 to a monthly bill of $100 for an improved grid. 

The state legislature is debating the merits of the proposal and alternatives. At a recent hearing, lawmakers voiced concerns the payouts would turn into blank checks for plant owners, fail to drive enough investment in new power plants and open the door for market manipulation and other abuses. Lake said protections will be put in place to ensure that doesn’t happen. 

Ercot Chief Executive Officer Pablo Vegas countered the state will indeed face capacity shortfalls because of strong demand growth if the right incentives aren’t put in place now.

On Wednesday at Infocast’s summit of the Electric Reliability Council of Texas, the operator of the state grid, some panelists said the PCM doesn’t tackle the right problem to begin with. Instead of a shortage of generating capacity, Ercot lacks fast-reacting power plants, known as peaker gas plants, and increasingly batteries that can keep the grid stable in real time.

“The energy-only market does not survive” with the creation of this type of capacity market, and in doing so the PCM will shift the risk of building generation to consumers from investors, said Resmi Surendran, vice president of Shell Energy North America. 

Katie Coleman, an attorney for the Texas Industrial Energy Consumers, said there’s no doubt PCM is creating a market that allows regulators to determine how much money generators should be paid for future capacity and consequently have the ability to “move billions of dollars” to those operators. The state should create targeted incentives for specific types of power supply rather than an annual market that pays the broader market every year, she said.

 “A hallmark of the capacity market is mistrusting the competitive market itself,” Coleman said. 

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